Europe’s Problems Are Far Bigger Than a Shallow Recession

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The euro zone appears to be in the middle of another recession but worries about whether definitive growth figures due early next year will have a plus or minus sign in front are missing the bigger picture.

The good news is that the 20-nation currency union is set to avoid a deep contraction that could scar firms, households and banks for years. The bad news is that growth is hovering around zero with little out there to fuel a meaningful recovery.

Economic headwinds are so strong that next year will also be challenging and fading growth potential suggests the euro zone would struggle to expand much more than 1% even with a robust rebound.

Deep structural problems mean Europe is bound to trail most other big economic areas for years to come.

NEAR TERM

The short term outlook is not great – but not terrible.

Data on Tuesday showed gross domestic product shrank 0.1% in July-September from the previous three months, pointing to a shallow recession, if a weak fourth quarter follows as early indicators suggest.

But growth has been broadly flat all year and record-high interest rates – a byproduct of the inflation surge – along with tighter budget spending will limit expansion to just 0.6% next year, according to a Reuters poll.

Optimists, including the European Central Bank’s chief economist Philip Lane, say that demand should recover as workers are now enjoying a rebound in real wages that will boost confidence.

The labour market remains tight and the world economy is rebounding, so external demand is also likely to be healthier.

Source : Reuters